Most web applications, online shopping websites and payment methods force users to choose between convenience and security: Somehow, convenience seems to come at the cost of security and security makes life somewhat inconvenient (see P2FM Services Walk The Tightrope Between Convenience and Security and How Usability Can Increase Adoption of Internet Banking for a couple of my previous blog posts on the intriguing tradeoff between convenience and security). This traditional convenience versus security tradeoff has inevitably led to many people shying away from online shopping either because they’re worried about identity theft or are weary of having to jump through too many hoops to complete a simple purchase transaction. Etailers seeking greater revenues by driving up online shopping and financial institutions attempting to cut costs by migrating more and more transactions to lower-cost online channels are among the many industries that would benefit from a resolution of this tradeoff.
Welcome to BOKU, BillToMobile, payMO, Zong and MobillCash. These startups belong to a relatively new genre of mobile payment methods that seems to have cracked the holy grail of convenience versus security. To differentiate them from traditional mobile payment / m-wallet applications that have been around for years, I’ll use the term “GenY Mobile Payments”, or, simply, “GYMPS”, while referring to these next generation of mobile payment providers. Traditional mobile payment providers like Obopay, mChek, Firethorn and many others insist that their users pre-register and pre-fund their accounts from conventional sources like credit / debit cards or bank accounts. They demand a change in consumer behavior in an everyday task like online shopping and the jury’s out on how widespread their adoption will ever become.
With GenY mobile payments, things are quite different. They deliver a powerful combination of convenience and security to online shoppers and don’t expect a change in consumer behavior.
As this video of BOKU explains, shoppers don’t have to pre-register for GYMPS, so there’re no user names and passwords to remember. They don’t ask you for credit or debit card details, so shoppers are saved the trouble of entering card number, expiration date, CVV and the like (estimated to be around 70-100 keystrokes), not to mention the anxiety of leaving behind their confidential financial information on a multitude of websites. With GYMPS, to buy something over the Internet, you just enter your already-memorized mobile phone number on the merchant’s website, wait for a few seconds to receive a unique password by SMS on your mobile phone, which you then enter on the website to complete the purchase transaction. You get billed for the purchase on your mobile bill (or, if you’ve a prepaid mobile phone, the purchase cost gets automatically deducted from your balance). Although your mobile number may be widely known and can be entered into a merchant’s website by anyone, since your mobile handset is (or should be) always with you , only you can read the unique password sent by GYMPS and complete the transaction. Called two-factor authentication in security parlance, this is the “crown jewel” of security. (If you lose your handset, GYMPS are just another reason for you to call your mobile service provider immediately to de-activate your connection).
GYMPS should score over other payment methods from the merchant’s perspective since they do not force merchants to hand over consumers to third party payment websites at the crucial moment of purchase. This is in sharp contrast with most other forms of alternative payments (like PayPal, BillMeLater, eBillMe, BillDesk, iDEAL, and so on) where merchants lose sales due to “shopping cart abandonment” if consumers face problems – or suddenly develop cognitive dissonance – during their mandatory visit to the alternative payment provider’s websites to complete the transaction. Zong, one of the leading GYMPS, even claims that merchants offering the payment method enjoy 10X conversion as compared to credit / debit card payments.
With such a rarely-found combination of convenience and security, GYMPs appear to have great appeal to consumers and merchants alike. With over two billion mobile phones in the world compared to fewer than 600 million credit / debit cards, will GYMPS trigger a surge in online shopping volumes? Will they push out traditional card payments now accounting for over 70% of online payments?
The real rub with GYMPS lies with their high transaction costs. Though banks and card networks – and hence interchange fees – are out of the GYMPS loop, telecom companies who own billing to the consumer, extract a big chunk for their service. As a result, merchants have to cough up as much as 30-50% of transaction values by way of processing fees in the case of GYMPS. Merchants who have been fighting card networks for years over the relatively paltry 2-3% interchange fees are not likely to sign up with GYMPS in droves at these levels of processing costs.
Zong does make a convincing argument that, despite high transaction costs, their 10X conversion rates (arising out of significantly lower shopping cart abandonments) can result in greater net revenues for the merchant as compared to credit card based payments. But, it remains to be seen how many merchants rigorously measure shopping cart abandonments in the first place; and, even amongst those that do, it is questionable how many will attribute abandonments solely to the lack of convenience and / or security inherent in other payment methods that cost them much less than GYMPS. (Interestingly, PayPal, a leading alternative payment provider which faces a threat to its transaction volumes if GYMPS grow in popularity, recently released a survey of top ten reasons why online shoppers abandon their transactions. Not surprisingly, security is at a distant # 10).
Until transaction costs head south from their current levels of 30-50%, we can expect the main appeal of Gen Y mobile payments to be restricted to online sales of digital goods (where the marginal cost is nil) or services at high margins. So, for now, GYMPS might want to direct their go to market efforts to such niche segments of the market instead of frittering away their marketing dollars to sign up each and every category of consumer and merchant.